Life Insurance vs. Term Insurance – Which One is Better?

For beginners, a life
insurance policy offers combined benefits of investment and
protection. A life insurance policy covers you for your entire
life or 100 years of age, whichever is lesser. Under such a life
insurance plan, the insured person pays a specific amount of premium
each year. A component of this annual premium is for the protection
part, while the remaining goes towards the market investments. In
case the company earns profits on the amount invested, then a bonus
is declared.

Over the time, a life
insurance policy, along with the bonus, builds cash value as well.
This cash value can be anytime withdrawn or surrendered by the
policyholder. In case of the policyholder’s survival for the entire
policy term, the cash value is paid to the policyholder. This cash
value is usually equal to the sum assured. In event of the
policyholder’s unfortunate demise during the policy term, this sum
assured I given to the beneficiary or nominee.

In a
whole life insurance policy, there are basically 3 options,
namely, limited pay option, limited pay and money back option, and a
regular pay option. However, as claimed by insurance companies, whole
life insurance policies are best for a traditional platform because
unit-linked platform requires active interest of the
policyholder. It is imperative for the insured to be responsive to
the market developments in order to keep his funds up with the
changes.

Term Insurance:

A Term Insurance Plan,
on the other hand, is purely a protection policy as it guards the
insured and his family against the unforeseen eventualities. The sum
assured here is decided by the policyholder on the basis of his
lifestyle and the amount of debt he is bearing at the moment. This
ensures that the burden of his debts and responsibilities do not come
on his family’s shoulders post his unfortunate demise. Term
insurance plans do not offer a maturity benefit in usual cases.

However, there are
add-ons or riders available in order to ensure returns of premiums
when the policy matures. In an unfortunate event of the
policyholder’s demise during the policy term, the sum assured is
paid to the beneficiary. These
term insurance plans are particularly suggested for the
individuals who do not have a completely fit health condition. Term
insurance plans are classified into following three types:

Level benefit

Increasing benefit

Decreasing benefit

Case
Study

Here is comparative
study of three different profiles of a single individual, a married
individual who has two young kids and a married individual who is in
his late 40s and has grown up children. This comparison has been done
by the way of discrete examples in order to explain the type of
policy that suits each profile.

Assumption: None of the
individuals has a life insurance policy as yet.

For an individual who
is not married, insurers suggest term insurance plans as a
better choice. The simple reason behind the logic is that term plans
offer high risk coverage at an extremely affordable cost of premium.
For example, under a term insurance plan, coverage of Rs. 10
lacs can be obtained by paying premiums as less as Rs. 2,500 per
annum for a term of 25 years.

On the other hand, a
married individual who has 2 young kids should always opt for a whole
life insurance plan as suggested by the insurance companies. However,
it is advisable to include a term rider in the plan. While the first
whole life insurance plan enables you to do systematic savings
with an option to withdraw funds as per your needs and requirements,
the term insurance rider offers enhanced protection factor for a
considerably low cost.

Simultaneously, for an individual who
is in his late 40s and has grown up kids, the experts and insurance
providers advice only a whole life insurance policy to be sufficient.
The basis of this statement is that a whole life insurance policy
apart from covering him for his entire life, offers the coverage at a
very low cost as compared to a term insurance plan. And at such an
age a whole life insurance plan tends to be more affordable.

The realistic function
of a whole life insurance plan is that it can be utilized to build
and leave behind some valuable assets for an individual’s heir(s).
However, insurers caution that a policyholder should get only a
minimal amount abstracted towards a risk cover.

Also, a plan must let
you withdraw funds free of any charges and should also offer a
surrender facility. Opting for a best
life insurance plan that offers cyclic payouts post the
completion of a certain specified period is also a good idea. Such an
income could serve the purpose of a retirement income. Additionally,
payouts from such options are also tax-exempt earnings, unlike a
retirement plan.

Riders

Insurance providers
claim that the riders are a must to be taken up with a life
insurance policy as they keep the benefits of that policy
relevant for the age profile of the policyholder. Insurance
companies nowadays have come up with a range of riders that if
attached to the life insurance plan can considerably enhance the
coverage and the benefits of the policy. For example, if you opt for
the 'waiver of premium' rider with your term insurance plan or
a whole life insurance plan, then in event of your disability to pay
premiums due to justified reason, the liability to pay the remaining
premiums would not come on your family and the premiums would be
waived off or settled by the insurer without having to discontinue
the policy. Also, in such a scenario, your child would receive the
complete maturity benefit without having to worry about paying the
premiums to keep the policy active.

Some other riders that are
recommended by the insurance providers and the experts are permanent
disability and accidental disability riders. Critical illness or
dread disease rider is another common type of rider. However, opting
for a mediclaim policy instead of this rider proves be a lot more
beneficial as a health insurance policy or a mediclaim policy
comes with a lot more additional features and benefits.